Australia’s central bank said it still holds sway over the nation’s economic cycle, downplaying suggestions that domestic lenders are blunting policy makers’ influence.
The RBA a week ago left its benchmark interest rate at 4.25 percent, defying the predictions of 24 of 27 economists for a third straight quarter percentage-point cut. Australia’s four largest lenders boosted mortgage rates anyway, citing higher funding costs that are narrowing their margins.
“I don’t think that changes the effect of monetary policy on the economy much at all,” Assistant Governor Guy Debelle, who oversees financial markets, said in response to questions at a Bloomberg conference in Sydney today. “When we move interest rates, it’s still going to have some impact on lending rates.”
Commonwealth Bank of Australia increased the interest on a variable rate home loan by 10 basis points to 7.41 percent yesterday, followed by National Australia Bank Ltd. (NAB), which added 9 basis points to 7.31 percent. Westpac Banking Corp. (WBC) boosted the cost by 10 basis points to 7.46 percent on Feb. 10, after Australia & New Zealand Banking Group Ltd. added 6 basis points to 7.36 percent. ANZ Bank and Westpac cited higher debt premiums and competition for deposits.
Treasurer Wayne Swan condemned the banks’ actions, urging customers to shop around for better rates.
Debelle said in his speech that a surge in international holdings of Australian government bonds, equal to more than 3 percent of gross domestic product over the first three quarters of 2011, has propelled the nation’s currency and pushed yields down to half-century lows.
“The Australian dollar is close to its recent highs despite the terms of trade declining from their peak in the September quarter,” Debelle said in the speech.
The local currency has risen about 5 percent this year and reached a six-month high of $1.0845 last week after the RBA unexpectedly kept rates unchanged at its Feb. 7 meeting.
Demand for Australian resources and rates that were higher than any other major developed nation spurred the Australian dollar to $1.1081 on July 27, the highest level since it was freely floated in 1983.
In response to questions, Debelle said the appreciation of the currency “is a tightening in conditions, which was taken into account in the board’s deliberations.”
Questioned on the difficulty in predicting the central bank’s intentions on borrowing costs, after only three economists correctly forecast no rate change last week, Debelle said he wasn’t sure if the RBA was hard to read.
When economists get “two months to think about things that’s dangerous, rather than four weeks,” he said, referring to a January break from monthly policy meetings. “What matters is the general direction on rates. What we’re doing is setting rates which are appropriate for the economy as a whole not what’s appropriate for bond-market position holding.”
Debelle’s prepared remarks were focused on the fallout of Europe’s sovereign-debt crisis on Australia. He said European policy makers’ introduction of a long-term refinancing operation has stabilized the region’s financial system, though uncertainty is likely to persist.
“There have been outbreaks of optimism over the past couple of years which were dashed,” Debelle said. “I think the only thing which is certain, is that uncertainty is likely to persist for some time to come.”
The European Central Bank is flooding the banking system with cheap money in a bid to avert a credit crunch after the market for unsecured bank debt seized up last year and funding from U.S. money markets disappeared. Any bank in the region can borrow an unlimited amount, provided it pledges eligible collateral.
Debelle, 45, said “a sizable share” of recent buying of Australian government bonds appears to have come from sovereign asset managers, spurring the nation’s currency toward a record.
He said that while fallout in Australia from Europe’s sovereign-debt crisis has been limited, it’s being felt in investors demanding “much higher compensation” for bank credit risk than they were in mid-2011.
“This global repricing of bank debt has clearly affected the Australian banks’ wholesale funding costs,” he said.
More than two years after the debt crisis emerged in Greece, European leaders face international pressure to do more to tackle the source of contagion that threatens to drag down the global economy. Group of 20 nations have signaled they won’t reach a consensus on crisis aid for Europe via the International Monetary Fund at a Feb. 24-26 meeting of G-20 finance chiefs until Europe increases the size of its firewall.
Debelle said there was the prospect of more relief on the issue of sovereign debt on the horizon.
“The ECB will conduct another 3-year operation at the end of the month,” he said. “There is some possibility that banks will use that operation to fund increased purchases of sovereign debt and earn the large carry on offer, which might help alleviate the sovereign pressures for a time.”
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